The Supreme Court confirmed the lower-court judgments that had rescinded the payments made to the managing director through remuneration, as the bylaw requisite to create the right to receive it had not been met, as well as payments made to shareholders through dividends, differentiating between the resolution of the meeting to distribute dividends and the payment of these dividends.

This judgment decided on the cassational appeals filed against three different judgments handed down in appeals, corresponding to three sets of insolvency proceedings arising from an arrangement with the creditors of a construction company.

The first set of proceedings referred to the non-fulfillment of a works contract arranged by the insolvent company. The Supreme Court repeated the doctrine of its judgment of April 15, 2014, no. 188/2014, differentiating between the compensation and liquidation of a terminated agreement. The system specified in article 58 IA does not apply to compensation resulting from a liquidation of the same contractual relationship, from which obligations could have arisen for both parties, even if the amount of these obligations is declared after the insolvency of one party. Therefore, it considered it logical that if the part of the credit that the principal owes the contractor for performing the works was withheld to guarantee the prompt fulfillment of the contractor’s obligation to fulfill and hand over the works and, therefore, pay the penalty if they are delayed, the owner of the works can apply the amounts withheld to the compensation payment for the delay.

We refer below in greater detail to the judgments on the rescission actions filed against the payments made to the managing director through remuneration, and to the shareholders through dividends.

Insolvency rescission of the remuneration of the managing director

Based on the proven facts, (i) the company entered in the accounts payments it made to the managing director of approximately €111,000 in 2003, and €55,000 in 2004, as “salaries and wages”; (ii) the system of administrators’ remuneration established in the bylaws was a 10% stake in the profits; and (iii) in financial years 2003 and 2004, the company had negative results.

The first instance judgment, confirmed on appeal, upheld the rescission action filed by the insolvency administration and ordered the managing director to return approximately €166,000. The Supreme Court dismissed the cassational appeal and confirmed the lower- court judgment.

The Supreme Court argued the following:

  1. It repeated the doctrine in its judgment of October 26, 2012, no. 629/2012, on the rescission of payments: a payment made in the two-year suspect period before  the  declaration of insolvency, providing it has matured and is due, generally benefits from justification and does not damage the estate’s assets. However, this does not prevent exceptional circumstances from occurring (situation of insolvency, proximity to the insolvency request, nature of the claim or condition of the creditor) that would prevent the justification of some payments breaching the par condicio creditorum.
  2. The payments to the managing director were not due because the circumstance established in the bylaws that would give the managing director the right to receive them (the existence of profit) had not been met. The managing director had not performed any additional services —only the functions inherent in his administrator position— to justify these payments. The Supreme Court stated that, under article 217 of the Capital Companies Act, the system  of administrators’ remuneration should appear in the corporate bylaws. The activities of running, managing, administering and representing the company are inherent to the administrative body and are affected by the requirements of article 217 of the Companies Act (the remuneration system should appear in the bylaws).
  3. Finally, it dismissed the appellant’s other arguments, considering that third parties (that were harmed due to the impairment of the estate’s assets) cannot be subject to the enforcement of alleged acts of the shareholders that had agreed to these payments. The Supreme Court also upheld that as administrators’ remuneration is not part of the company’s business activity, it is not an ordinary action of the business activity under article 71.5.1º IA,4 and must not be considered to have been carried out under normal conditions, when the payment was not due and was made without any profits, deviating from the bylaw provision justifying it.

Insolvency rescission of the dividends paid to shareholders

Based on the proven facts, (i) the company agreed to distribute dividends at the ordinary general meetings of 2002 and 2003 for financial years 2001 and 2002, respectively; (ii) the dividends were paid after the distribution resolution was adopted; (iii) at the beginning of 2013, the company was already accumulating losses.

The first instance judgment, confirmed under appeal, upheld the rescission action filed by the insolvency administration against the ordinary meeting resolution of 2003, and ordered the shareholders to return the payment. The distribution resolution on dividends adopted at the ordinary meeting of 2002 could not be rescinded because it was prior to the two-year suspect period preceding the declaration of insolvency established under article 71 IA. However, in the lower court, the payments of dividends made to enforce this resolution were rescinded because the company was suffering significant losses when they were made. The shareholders were ordered to return what they had been paid in dividends.

The Supreme Court also dismissed the cassational appeal and confirmed the lower-court judgment, based on the following arguments:

The Supreme Court differentiated between the rescission of the distribution of dividends resolution adopted by the shareholders meeting, and the rescission of the payment made to the shareholders, within the suspect period, of the dividends agreed at a meeting held outside the rescission period.

The distribution resolution on dividends adopted at the ordinary meeting of 2003 was to be rescinded because it was an “irregular” dividend distribution agreement. The lower-court judgment declared it proven that the company, far from having profited, was suffering from significant losses. If the resolution was based on non-existent net profit, there was no question of the unjustified sacrifice of assets resulting from granting shareholders the right to receive a dividend.

The Supreme Court also stated that article 278 of the Companies Act,5 regulating the return of dividends outside the insolvency, was not applicable to the insolvency rescission action. The rescission action under article 71 IA is based on the objective element of damage, thus excluding any subjective element.

Regarding the payment of dividends agreed at the ordinary meeting of 2002, as these payments were due, the Supreme Court referred to the doctrine in its judgment of October 26, 2012, no. 629/2012, described above. These legal acts differ from the meeting resolution on the distribution of dividends and can be analyzed separately, but if the action is brought against the payment and not against the resolution, the justification of damage cannot be based on the irregularity of this resolution, but on reasons inherent in the corresponding acts.

The lower court proved that when the payments were made, the company was suffering significant losses. Therefore, the position of the recipient shareholders, the nature of the claims (dividends) and the fact that the company was concealing significant losses, highlighting the illogical nature of the payment of the dividends agreed and the company’s need to capitalize, “make the payment in this case unjustified, however due it might have been.”6